Issues on hold

MTNL defers its GDR issue and its domestic public offer owing to adverse market conditions. What are the factors at play?

THE Government was all set go ahead with the global depository receipts (GDR) issue of Mahanagar Telephone Nigam Limited (MTNL) in early November, the depressed market conditions notwithstanding. However, on November 10, hours before the roadshow was to begin, it was decided to put off the offer of 19 million GDRs. Surprisingly, the advice to do this came not from within the Government, which should have been watchful of the market sentiment while selling the family silver, but from the merchant bankers Goldman Sachs, HSBC Investment Banking and Merrill Lynch, the global coordinators to the issue.

MTNL promptly set up a task force comprising its functional directors and representatives of the Department of Telecommunications, the Ministry of Finance and the Bureau of Public Enterprises to evaluate the advice. The conclusion was that it would be pr udent to defer the issue and this was communicated to the core group of senior Secretaries. The issue has been put off until the market picks up; that is, possibly until the end of the current fiscal year.

S. Sundaresan, MTNL's Director of Finance, told Frontline that even the domestic issue, which was to have offered around 2.25 per cent of the paid-up capital as employee stock option (ESOP), had been deferred. The company's proposal to offer a max imum of 200 shares to each employee in the C and D categories who had opted for permanent absorption, had been approved by the Union Cabinet and an offer price of Rs.146 had been fixed. Even the public offering of about 1 per cent of the paid-up capital, which was also to be at a slight discount on the market price, had also been deferred, he said. The GDR, the ESOP and the public offer would have brought down government stake in MTNL to 51 per cent: currently, it is around 56.25 per cent. During the pa st six months MTNL shares had hit a high of Rs.230 and a low of Rs.154. The company's previous GDR issue, of 1997, is quoted at a discount.

WHAT are the reasons for the lukewarm investor interest in the scrip? S. Rajagopalan, MTNL's Chairman and Managing Director, told Frontline that the company's troubles with the Telecom Regulatory Authority of India (TRAI) had an impact on its rati ng in the international investor community (Frontline, November 5, 1999). "They don't go into the nitty gritty of whose case is right. As far as investors are concerned, MTNL was not able to deliver on its promises. The last time we accessed the g lobal market we had promised that we would have our GSM (groupe speciale mobile) service operational by now. We have not kept that promise. Now, whether it is because of laxity on our part or because of obstacles placed by the policy/regulatory regimes i s something that the investor is not interested in. It has impacted on our credibility. Similarly, the revenues in the last quarter dipped by 13 per cent. We can explain that it is because of the new tariffs recommended by the regulator, but internationa l investors do not accept such explanations," Rajagopalan said.

According to Sundaresan, tariff rebalancing has cost MTNL Rs.100 crores. A part of this, however, could be recouped when the company claimed a tax holiday with retrospective effect from 1997-98, he said.

The Government has approved a proposal to amend MTNL's articles of association. An extraordinary general body meeting of the company held on November 19 approved a proposal to delegate the following powers to the board, which is now broadbased, with the induction of three persons from outside as directors: 1. To incur capital expenditure on the purchase of new items or for replacement without any monetary ceiling; 2. To enter into technological joint ventures or strategic alliances; 3. To effect organis ational restructuring, including the establishment of profit centres, the opening of offices in India and abroad, the creation of new activity, and so on; 4. To create and wind up all posts including and up to those of non-board-level directors (the boar d will be given powers to make appointments up to this level, including the power to effect internal transfers and redesignation of posts); 5. To structure and implement schemes relating to personnel and human resource management, training, voluntary or compulsory retirement, and so on; 6. To raise funds from domestic capital markets and to borrow from international markets, subject to the approval of the Reserve Bank of India/Department of Economic Affairs, to be obtained through the administrative min istry; and 7. To establish financial joint ventures and wholly owned subsidiaries in India or abroad with the stipulation that the equity investment of the public sector enterprise (PSE) should be not more than Rs.200 crores in any one project, or 5 per cent of the net worth of the PSE in any one project, or 15 per cent of the net worth of the PSE in all joint ventures/subsidiaries put together.

The amendment is in tune with what the Government had proposed for all Navaratna public sector undertakings (PSUs). "It will give us the necessary autonomy to take commercial decisions to improve share-holder value," Rajagopalan said. He believes that th e step will lead to a positive reaction in the market and push up MTNL share prices. Even so, he would like to look for a major catalyst that would push the price of the MTNL scrip high enough for a chunky divestment, whether it is in the domestic market or through the GDR route. That catalyst could come in the form of the coveted Chennai circle, for which some preliminary negotiations are on. It could cost up to Rs.1,000 crores, but for a company that is sitting on reserves of over Rs.5,000 crores, it is not awesome.

The amendment to the articles of association would also enable MTNL to place privately its equity with select investors. During the earlier GDR issue, British Telecom, France Telecom and Italian telecom companies had offered to take sizable stakes in the company. But, in lieu, they wanted their representatives on the MTNL board, a proposal that was not acceptable to the company.

The other option is to offload a sizable chunk of shares in the domestic market, at the risk of their all being mopped up by any one interested investor. A third proposal - to buy back MTNL's own shares and extinguish them - is also under consideration. The company has a paid-up capital of Rs.630 crores and Rajagopalan believes that downsizing the equity base will enhance value for the remaining shareholders.

THE company, with reserves and surpluses of Rs.5,619 crores, is chalking out plans to deploy its reserves gainfully. "We have a geographic limitation that prevents us from expanding horizontally. So we have to think of vertical integration," Rajagopalan said. Acquisition of companies that manufacture fibre optic cables and telephone instruments is also on the cards. MTNL is holding talks with companies manufacturing fibre optic cables. It may also buy out smaller telecom ventures, offering both basic an d cellular services. There is also a proposal to take up basic telephone services in the satellite townships of Delhi. The company proposes to replace its 16 lakh cable lines with fibre optic cables.

Also on the anvil is a 100 per cent subsidiary, Millennium Telecom, which will take over Internet and other value added services. Its paid-up capital is likely to be around Rs.50 crores. MTNL plans to seek a strategic partner for the subsidiary once it i s launched. Singapore Telecom has evinced interest in the venture and might participate in the equity as well, in which case MTNL's reserves will swell further.

Meanwhile, DoT has joined issue with TRAI on the Calling Party Pays (CPP) regime with a separate petition in the Delhi High Court: DoT has challenged TRAI's authority to issue directives asking that fixed-line subscribers be charged more for calls to mob ile lines under the Telecommunications Inter-connection (charges and revenue sharing) first amendment. MTNL has also filed an intervention petition challenging TRAI's order on CPP, which, it claims, was issued even as the matter was being heard by the co urt. A Division Bench comprising Justice S.N. Variava and Justice S.K. Mahajan will hear the three petitions, of MTNL, DoT and TRAI, on November 30.

A curious buyout

THE National Thermal Power Corporation (NTPC), with reserves of Rs.12,000 crores, is to buy out its poor cousin, the National Hydro Power Corporation (NHPC), for a whopping Rs.4,500 crores. The Government hopes that the decision will not raise the hackle s of trade unions since both are public sector units. On the face of it, too, the move seems non-controversial, since the Government will continue to retain control over the NHPC through the NTPC and will get a bonus of Rs.4,500 crores in the bargain.

However, the arrangement is a problematic one. The NTPC is a profit-making enterprise and has the largest installed capacity in thermal power generation. Its track record of adding capacity is good and contrasts sharply with the failure of the private se ctor to come up with the expected level of investments in the power sector. The move to make the NTPC buy out the NHPC will cause the diversion of precious resources from new capacity creation to the acquisition of existing hydel capacity.

It would not be unreasonable to assume that the main objective of privatising the power sector was to attract investments to bridge the demand-supply gap - investments which the Government could not mobilise by itself. The NTPC has been able to mobilise resources and has core competence in the power generation business. Instead of allowing it to do what it knows best to help narrow the demand-supply gap, the Government is now directing it to fritter away its resources by acquiring another PSU, one that is on the verge of a debt-trap.

The NTPC would have been able to add capacity to the tune of 1,000 megawatts at current rates with the Rs.4,500 crores it is to pay to buy out the NHPC. Had it leveraged this capital to raise further resources, it could have raised four times the amount. This would have enabled it to set up 5,000 megawatts of additional capacity. Instead, it has to use its strength to raise resources for the NHPC.

Union Power Minister P. Rangarajan Kumaramangalam, who was asked about this issue during the Economic Editors' Conference, failed to come up with a convincing defence. All that he could say was that the acquisition would unleash the synergies that the NT PC would require to get into hydel generation.

The Power Minister did not dispute that the funds will go into the government's kitty. He appeared to be quite satisfied with Finance Minister Yashwant Sinha's promise that some of it will come the Power Ministry's way. It is surprising that the Minister should be so sanguine even after what the Government did to the oil pool account and the road cess fund.